nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2016‒10‒02
thirteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Macroeconomics implications of female entrepreneurs facing financial frictions to access to credit: A DSGE model approach in Cameroon By Thierry Kame Babilla; Adele Ngo Bilong; Sandra Kendo; Martin Jaures Ndzana Eloundou
  2. Credit market heterogeneity, balance sheet (in) dependence, financial shocks By Chris Garbers; Guangling Liu
  3. Real exchange rates and international co-movement: news-shocks and non-tradable goods with complete markets By Lambrias, Kyriacos
  4. Bootstrapping DSGE models By Giovanni Angelini; Giuseppe Cavaliere; Luca Fanelli
  5. Aggregate Recruiting Intensity By Alessandro Gavazza; Simon Mongey; Giovanni L. Violante
  6. EAGLE-FLI - A macroeconomic model of banking and financial interdependence in the euro area By N. Bokan; A. Gerali; Sandra Gomes; P. Jacquinot; P. Pisani
  7. Endogenous information revelation in a competitive credit market and credit crunch By Yuanyuan Li; Bertrand Wigniolle
  8. Credit segmentation in general equilibrium By Sebastián Cea-Echenique; Juan Pablo Torres-Martínez
  9. Asset Pricing with Experience Effects By Malmendier, Ulrike; Pouzo, Demian; Vanasco, Victoria
  10. Education, lifetime labor supply, and longevity improvements By Sanchez-Romero, Miguel; d'Albis, Hippolyte; Fürnkranz-Prskawetz, Alexia
  11. Vieillissement démographique et réforme paramétrique des retraites. Les enseignements d’un modèle EGC-GI pour le Maroc. By Loumrhari, Ghizlan
  12. Pricing and Liquidity in Decentralized Asset Markets By Uslu, Semih
  13. Job Qualities, Search Unemployment, and Public Policy By Jian Xin Heng; Benoit Julien; John Kennes; Ian King

  1. By: Thierry Kame Babilla; Adele Ngo Bilong; Sandra Kendo; Martin Jaures Ndzana Eloundou
    Abstract: This research assesses the effects of financial frictions faced by female entrepreneurs on macroeconomics performances in Cameroon. We address this important issue, using a Dynamic Stochastic General Equilibrium model with financial micro-foundations. The model features two sectors such as, a production sector dominated by female entrepreneurs and a production sector dominated by male entrepreneurs. Financial frictions appear because entrepreneurs face collateral constraints when borrowing from the banking sector. The steady state and the calibration analysis demonstrate that the female sector is labor-intensive whereas the male sector is capital intensive. But, when the female sector is granted loans to the same extent as in the male sector, it performs better in term of value-added in GDP. The benchmark analysis reveals the complementary role of both sectors in sustaining economic activity during a downturn. The Scenarios analysis emphasizes the expansionary effect of the loosening financial constraint, with female entrepreneurs acting as main driver of the economy activity. Thus, institutional frameworks that relax collateral constraints, grant exemptions for enormous requirements, enforce properties right law, and promote transparency and credit-information sharing can make big inroads in alleviating borrowing constraints, increasing financial inclusion and enhancing macroeconomic outcomes.
    Keywords: Female Entrepreneurs, Financial Frictions, Macroeconomics Implications, DSGE Model, Cameroon.
    JEL: C11 C61 D21 E32 E44 O11
    Date: 2016
  2. By: Chris Garbers; Guangling Liu
    Abstract: This paper presents a real business cycle model with financial frictions and two credit markets to investigate the qualitative and quantitative relevance of credit market heterogeneity. To address this line of inquiry we contrast the transmission of financial shocks in an economy where loans are the only form of credit to one in which both loans and bonds exist. We estimate the model using Bayesian methods over the sample period 1985Q1 { 2015Q1 for the U.S. economy. We find that credit market heterogeneity plays an important role in attenuating the impact of financial shocks by allowing borrowers to substitute away from the affected credit market. The shock attenuation property of credit market heterogeneity works through asset prices and substitution toward alternative credit types. Bank balance sheet linkages reduce the shock attenuation effect associated with heterogeneous credit markets. The origination of financial shocks can influence both the size and the persistence of their impact.
    Keywords: Credit Market, Business Cycle, Financial Inter-mediation, Operational Diversification, heterogeneity, DSGE
    JEL: E32 E43 E44 E51 E52 E20
    Date: 2016–09
  3. By: Lambrias, Kyriacos
    Abstract: We propose a fully flexible, complete-market model of the international business cycle that is consistent with two major empirical facts: positive cross-country co-movement of economic aggregates and a negative correlation between the real exchange rate and relative consumption (the Backus-Smith puzzle). The novelty of our paper is twofold. First, we allow for imperfect substitutability of capital which significantly reinforces Harrold-Balassa-Samuelson effects, producing more empirically relevant movements in real exchange rates. Second, we introduce changes in expectations (news-shocks) as an explanation to the Backus-Smith puzzle through movements in relative hours across countries, while being consistent with expectations-driven economic expansions. JEL Classification: F41, F44
    Keywords: Backus-Smith Puzzle, news-driven cycles, real-exchange rates
    Date: 2016–08
  4. By: Giovanni Angelini (Università di Bologna); Giuseppe Cavaliere (Università di Bologna); Luca Fanelli (Università di Bologna)
    Abstract: This paper explores the potential of bootstrap methods in the empirical evalu- ation of dynamic stochastic general equilibrium (DSGE) models and, more generally, in linear rational expectations models featuring unobservable (latent) components. We consider two dimensions. First, we provide mild regularity conditions that suffice for the bootstrap Quasi- Maximum Likelihood (QML) estimator of the structural parameters to mimic the asymptotic distribution of the QML estimator. Consistency of the bootstrap allows to keep the probability of false rejections of the cross-equation restrictions under control. Second, we show that the realizations of the bootstrap estimator of the structural parameters can be constructively used to build novel, computationally straightforward tests for model misspecification, including the case of weak identification. In particular, we show that under strong identification and boot- strap consistency, a test statistic based on a set of realizations of the bootstrap QML estimator approximates the Gaussian distribution. Instead, when the regularity conditions for inference do not hold as e.g. it happens when (part of) the structural parameters are weakly identified, the above result is no longer valid. Therefore, we can evaluate how close or distant is the esti- mated model from the case of strong identification. Our Monte Carlo experimentations suggest that the bootstrap plays an important role along both dimensions and represents a promising evaluation tool of the cross-equation restrictions and, under certain conditions, of the strength of identification. An empirical illustration based on a small-scale DSGE model estimated on U.S. quarterly observations shows the practical usefulness of our approach.
    Keywords: Bootstrap, Cross-equation restrictions, DSGE, QLR test, State space model, Weak identification.
    Date: 2016
  5. By: Alessandro Gavazza; Simon Mongey; Giovanni L. Violante
    Abstract: We develop a model of firm dynamics with random search in the labor market where hiring firms exert recruiting effort by spending resources to fill vacancies faster. Consistent with micro evidence, in the model fast-growing firms invest more in recruiting activities and achieve higher job-filling rates. In equilibrium, individual decisions of hiring firms aggregate into an index of economy-wide recruiting intensity. We use the model to study how aggregate shocks transmit to recruiting intensity, andwhether this channel can account for the dynamics of aggregate matching efficiency around the Great Recession. Productivity and financial shocks lead to sizable pro-cyclical fluctuations inmatching efficiency through recruiting effort. Quantitatively, the main mechanism is that firms attain their employment targets by adjusting their recruiting effort as labor market tightness varies. Shifts in sectoral composition can have a sizable impact on aggregate recruiting intensity. Fluctuations in new-firm entry, instead, have a negligible effect despite their contribution to aggregate job and vacancy creations.
    JEL: E24 E32 J21 J23 J63
    Date: 2016–09
  6. By: N. Bokan; A. Gerali; Sandra Gomes; P. Jacquinot; P. Pisani
    Abstract: We incorporate financial linkages in EAGLE, a New Keynesian multi-country dynamic general equilibrium model of the euro area (EA) by including financial frictions and country-specific banking sectors. In this new version of the model, termed EAGLE-FLI (Euro Area and GLobal Economy with Financial LInkages), banks collect deposits from domestic households and cross-country interbank market and raise capital to finance loans issued to domestic households and firms. In order to borrow from local (regional) banks, households use domestic real estate as collateral whereas firms use both domestic real estate and physical capital. These features - together with the full characterization of trade balance and real exchange rate dynamics and with a rich array of financial shocks - allow to properly assess domestic and cross-country macroeconomic effects of financial shocks. Our results support the views that (1) the business cycles in the EA can be driven not only by real shocks, but also by financial shocks, (2) the financial sector could amplify the transmission of (real) shocks, and (3) the financial/banking shocks and the banking sectors can be sources of business cycle asymmetries and spillovers across countries in a monetary union.
    JEL: E51 E32 E44 F47
    Date: 2016
  7. By: Yuanyuan Li (University of Bielefeld - University of Bielefeld, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Bertrand Wigniolle (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)
    Abstract: In this paper, we propose a new mechanism able to explain the occurrence of credit crunches. Considering a credit market with an asymmetry of information between borrowers and lenders, we assume that borrowers have to pay a cost to reveal information on the quality of their project. They decide to be transparent if it is necessary for getting a loan or for paying a lower interest rate. Two types of competitive equilibria may exist: an opaque equilibrium in which all projects receive funding without revealing information; a transparent one in which only the best projects reval information and receive funding. It is also possible to get multiple equilibria. Incorporating this microeconomic mechanism in an OLG model, the economy may experience fluctuations due to the change of regime, and indeterminacy may occur.
    Keywords: endogenous information revelation,credit crunch
    Date: 2016–01
  8. By: Sebastián Cea-Echenique (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Juan Pablo Torres-Martínez (Department of Economics, Faculty of Economics and Business - University of Chile [Santiago])
    Abstract: We build a general equilibrium model with endogenous borrowing constraints compatible with credit segmentation. There are personalized trading restrictions connecting prices with both portfolio constraints and consumption possibilities, a setting which has not thoroughly been addressed by the literature. Our approach is general enough to be compatible with incomplete market economies where there exist wealth-dependent and/or investment-dependent credit access, borrowing constraints precluding bankruptcy, or assets backed by physical collateral. To prove equilibrium existence, we assume that both investment on segmented assets is not required to obtain access to credit and transfers implementable in segmented markets can be super-replicated by investing in non-segmented markets. For instance, this super-replication property is satisfied if either (i) all individuals have access to borrow at a risk-free rate; or (ii) financial contracts make real promises in terms of non-perishable commodities; or (iii) promises are backed by physical collateral.
    Keywords: Incomplete Markets,General Equilibrium,Endogenous trading Constraints
    Date: 2015–10
  9. By: Malmendier, Ulrike (University of CA, Berkeley); Pouzo, Demian (University of CA, Berkeley); Vanasco, Victoria (Stanford University)
    Abstract: How does the experience of a financial crisis and stock-market fluctuations alter the dynamics of financial markets? Recent evidence suggests that individuals overweight personal experiences of macroeconomic shocks when forming beliefs about risky outcomes and making investment decisions. We propose a simple OLG model of experience-based learning where risk averse agents can invest in risky and risk-free assets. They form beliefs about the payoff of the risky asset (1) based on data observed during their lifetimes so far and (2) exhibiting recency bias, the two components of experience effects. We show that, in equilibrium, prices depend on past dividends, but only those observed by the generations that are alive, and they are more sensitive to more recent dividends. Younger generations react more strongly to recent experiences than older generations and, hence, have higher demand for the risky asset than the old in good times, and lower demand in bad times. The model generates predictions for stock-market dynamics and trading volume: First, a recent crisis will increase the average age of agents holding stocks, while booms would have the opposite effect. Second, the stronger the disagreement across generations (e.g. after a recent shock), the higher is the trade volume. We provide stylized facts from the Survey of Consumer Finances consistent with these predictions.
    Date: 2016–05
  10. By: Sanchez-Romero, Miguel; d'Albis, Hippolyte; Fürnkranz-Prskawetz, Alexia
    Abstract: This paper presents an analysis of the differential role of mortality for the optimal schooling and retirement age when the accumulation of human capital follows the so-called "Ben-Porath mechanism". We set up a life-cycle model of consumption and labor supply at the extensive margin that allows for endogenous human capital formation. This paper makes two important contributions. First, we provide the conditions under which a decrease in mortality leads to a longer education period and an earlier retirement age. Second, those conditions are decomposed into a Ben-Porath mechanism and a lifetime-human wealth effect vs. the years-to-consume effect. Finally, using US and Swedish data for cohorts born between 1890 and 2000, we show that our model can match the empirical evidence.
    JEL: I25 J10 J24 J26
    Date: 2016
  11. By: Loumrhari, Ghizlan
    Abstract: The objective of this article is to estimate the effects of the population aging on the financial viability of the pension system and the macroeconomic evolution in a general way. To do it, we built a computational OLG model. The results show that the current ageing and which will accelerate in the 2030s will have dramatic consequences both on the financial and economic plans. The increase of the rate of contribution and the reduction in retirement pensions if they can assure the financial balance of pension funds seem impossible to be implemented economically and socially. Indeed, to maintain the balance of pension funds, the government should increase the rate of contributions of 20 points or to lower the benefits of practically 30 %. Certainly, it is always possible to combine these two reforms with an increase of two years the retirement age and the introduction of a dose of capitalization but it seems insufficient.
    Keywords: Vieillissement démographiques, systèmes de retraite, modèles à générations imbriquées, Maroc
    JEL: C68 E24 H55 J26
    Date: 2016
  12. By: Uslu, Semih
    Abstract: I develop a search-and-bargaining model of liquidity provision in over-the-counter markets where investors differ in their search intensities. A distinguishing characteristic of my model is its tractability: it allows for heterogeneity, unrestricted asset positions, and fully decentralized trade. I find that investors with higher search intensities (i.e., fast investors) are less averse to holding inventories and more attracted to cash earnings, which makes the model corroborate a number of stylized facts that do not emerge from existing models: (i) fast investors provide intermediation by charging a speed premium, and (ii) fast investors hold larger and more volatile inventories. Then, I use the model to study the effect of trading frictions on the supply and price of liquidity. The results have policy implications concerning the Volcker rule.
    Keywords: Search frictions; Bargaining; Price dispersion; Financial intermediation
    JEL: D53 D61 D83 G1 G11 G12 G21
    Date: 2015–11–02
  13. By: Jian Xin Heng (Yale University); Benoit Julien (UNSW Australia); John Kennes (Aarhus University); Ian King (School of Economics, University of Queensland)
    Abstract: We analyse the impact of public policy on unemployment and the qualities of jobs created in an economy with directed search frictions. Policy variables include unemployment benefits, job creation subsidies, and a graduated income tax structure with a government budget constraint. Firms choose to create either high or low quality jobs and bid for labor. We find, among other things, that neither the upper tax threshold nor the upper tax rate affect the mix of job qualities or unemployment, and that, while subsidies to high quality jobs affect the mix of job types, they have no effect on unemployment. We also identify a policy configuration that allows for the simultaneous existence of constrained efficiency, ex post equity, and a balanced government budget.
    Keywords: Directed search, job heterogeneity, public policy
    JEL: J64 H21
    Date: 2016–07–25

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